I expect to publish a performance-related post or two, but timeliness dictates I first take a closer look at what’s hot or not in The Great Irish Share Valuation Project. This year’s valuation phase was a 10 post epic stretching from Feb to May – so end-H1 presents a good opportunity to update share prices (plus some underlying valuation-related variables, primarily FX rates), and re-rankall 80 Irish shares in terms of their current upside potential. Obviously, I haven’t updated my underlying intrinsic valuations on the fly – that was never the intention – so pay close attention to any subsequent results & news flow for shares that might interest you. [But I generally find intrinsic valuations change slowly/incrementally]. I do have two last minute exceptions though:

Well, this update’s pretty simple: Just a week ago, Kentz announced a recommended cash offer by SNC-Lavalin Group (SNC:CN) at GBP 935p per share. This seems to have taken the market by surprise, but it’s only an 18% premium vs. the 792p price target I published 3 months ago – arguably, one would expect such an additional control premium. I’ve even heard some PI mutterings about other potential bids… Yes, that’s always a possibility, but it doesn’t seem very realistic in this instance: With two other suitors rejected last year, I’m sure management explored all other possibilities before dropping their drawers for SNC-Lavalin.

Despite that, ideally I’d like to re-assess my valuation to determine whether a higher bid could be justified. But there’s been no subsequent results, except for a 10% increase in the company’s backlog (to $4.5 billion, plus a further $125 million contract announced in June). Which is clearly encouraging, but not much of a tangible basis for increasing my price target significantly. At this point, the most likely & logical price target is the recommended cash offer itself…

As of June 25th, total net outstanding debt was $24.9 million (from Arawak & Macquarie Bank). Which looks about right, as year-end debt was $30 M & cash was fairly minimal – the subsequent debt reduction was essentially funded by the net 4.8 M raised from the March placing. To this we can add the upfront farm-out payment of 35 M to be received from Oil India. Unfortunately, this is offset by a substantial dilution in asset value, with Licence 61/67 reserves reduced to 11.3 M of 1P & 72.2 M of 2P barrels of oil – which we’ll value at my usual ‘in-the-ground’ $10 & $5 per proved & probable boe of reserves:

So, Petroneft continues to look massively under-valued..!? OK, I know somebody’s dying to talk about Russian political risk, domestic Russian oil prices, the implied value of the Oil India deal, etc. Let’s skip that debate – note the farm-out was a totally distressed deal, my in-the-ground values are 100% valid in a global context (and I believe in the long-term power of convergence, smuggling, arbitrage, call it what you will), and (most importantly) my valuation incorporates a mere 20% of the company’s post-deal 3P reserves & exploration resources.

There’s also the cash situation – as PTR investors have painfully learned, cash (or lack thereof) is often far more relevant to market valuation & sentiment than underlying asset values. But what’s been overlooked in the past couple of years is Petroneft’s generation of 8 M of operating cash (on average) a year. Which actually translated into 3.6 M of free cash flow before interest expense (and 0.9 M after interest expense) in 2013! Now, we should see a reduction in operating cash flow (at least initially, due to PTR’s reduced stake in Licence 61), but the elimination of 3 M odd of annual interest expense should provide a decent offset. And Petroneft now has another 45 M on tap from Oil India for Licence 61 exploration & development expenditure (which doesn’t feature in my valuation).

If management exercises some prudence, it’s reasonable to assume the company can remain cash flow positive & debt free going forward, while Oil India funds a steady increase in production & (ideally) reserves. [NB: Plus we still have an activist, Natlata Partners, on the register with a chunky 14.75% stake – hopefully, they’re in for the long haul & will continue to hold management’s feet to the fire]. On the other hand, the share price still seems to be painting a very different picture..! But when a chart looks like this, the market will often hate a company & its share price long past what seems like an obvious inflection point:

After enduring such a decline, many investors (new & old) can’t even stomach the thought of buying ’til the shares rally at least 100% – then gradually excitement, conviction, greed & momentum all start kicking in! My own portfolio holding in PTR was never very large (fortunately), and now amounts to a mere 0.6% – I’ve yet to decide if a value investing perspective’s at all useful in determining whether I should add to this position…

Price Target: GBP 35.3p

Upside/(Downside): 442%

_

Right, let’s get the crap out of the way – here’s the latest TGISVP Bum Dozen:

– Junior Resource Stocks: Pretty much the usual suspects, and all of them basically worthless! Predicting their collapse is child’s play, of course – what actually surprises me is the continuing (& increasing?) market revulsion with the juniors right across the board. Perish the thought, but at this rate we’ll surely have muppets claiming they’re value investors next..!?

– Greencore Group (GNC:LN):Greencore, you popinjay, you dodgy egg sarnie…how doth investors love you!? We’ve had another set of interims since – predictably, net debt’s increased yet again, though cash flow from operations has improved substantially (yoy). Judging by management’s enthusiasm, I expect the US to be a bottomless pit of investment for years to come – so operating free cash flow (of GBP 9.8 M) is unlikely to improve. In the most recent period, that unfortunately equates to just 1.2 times coverage of GNC’s net interest expense – that’s a skimpy bloody sandwich…

Now, let’s wash that nasty taste away with the latest TGISVP Top Dozen:

– Junior Resource Stocks: Somewhat ironically, this table’s also chock-a-block with the juniors! Heaven forbid, maybe we’ll finally reach a point where buying a basket of these stocks actually makes sense… But I don’t think we’ve reached a selling climax yet: Keep an eye on natural resource investment trust/companies (& closed-end funds), particularly those focused on the juniors – their share prices have already collapsed, but when you see their NAV discounts widen sufficiently (to 25-50%), that’s the real buying signal for the sector. Meanwhile, these suspects all appear to possess substantial underlying asset value – based on their reported reserves & resources – but continue to struggle with their cash burn rates & daunting fund-raising ambitions.

– REACT Energy (REAC:LN)&Formation Group (FRM:LN): Frankly, these belong in the same damn bucket – they also have obvious tangible value & upside potential, but the cash & fund-raising required to meet their apparent ambitions is an equally large challenge.

–Ovoca Gold (OVG:LN): Ovoca’s the odd man out…it’s controlled by the Russians, and that’s actually a far worse proposition than a company that’s merely operating in Russia! And results this week seem to suggest the company’s liquid/realizable assets will soon be re-deployed into other Russian natural resource investments, so any prospect of shareholders receiving cold hard cash here appears increasingly remote.

–Norish (NSH:LN)&Prime Active Capital (PACC:ID): Both are rather fascinating special situation stocks. Norish presents attractive upside, even as it stands – i.e. despite its astonishingly bad management team & strategy. And the stock could be worth a multiple of the current share price if its property portfolio (cold storage certainly couldn’t be described as a viable business) was sold off, and the proceeds re-invested into Townview Foods (a potential jewel in the crown) & share repurchases. Don’t hold your breath for management to do any of this though…an activist is obviously required here. On the other hand, PACC presents a far more immediate pay-out – its latest set of results makes for interesting reading: Shareholders will soon discover if their shares are worthless, or possibly worth a multiple of the current share price…

– Aer Lingus Group (AERL:ID): And finally…Aer Lingus, which may be the last remaining Irish large-cap/blue chip bargain! Plus it offers an all too rare play on the Irish consumer & a potential inward surge of tourism. [With the Euro still holding up well, as I’d expected all along, Ireland’s one of the few European countries that’s now significantly cheaper for tourists (due to lower labour costs, etc.). This compares to the likes of Greece, for example, where rapacious unions still fight for high wages for the select few…while the rest of the country rots in near-permanent unemployment]. And speaking of, I’m amazed to see Aer Lingus management (which is otherwise doing a pretty good job, in my opinion) attempting once again to snatch defeat from the jaws of victory in its latest union dealings.

To pay public obeisance to the Expert Panel’s recommendations before obtaining definitive union agreement is a pathetic negotiating tactic. And insisting on a functioning internal dispute resolution mechanism in return for increased pension payments is even more ridiculous – what’s required from the union is absolutely no disputes, in return for a finalpension payment (even if it costs more again). Once (or should I say if) this pension/labour dispute is put to rest, I’d actually expect a rapid & substantial improvement in shareholder value – this might be a substantial return of capital or a tender offer (to distribute surplus cash), and/or a potential new partnership or even a takeover offer..?!

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13 thoughts on “TGISVP – End-H1 2014 Snapshot”

Hi Wexboy, well if you hear from me again it wont be re. Petroneft as i finally ran out of patience with the continued falling SP and have sold out…!!! Canaccord’s HOLD rating and price target of 7.5p was the final straw for me… Will continue to read your postings though GL2U.

Wexboy, did you read El1te Traders recent summary on PTR. Like you he too sees PTR as been very much undervalued……He believes that much of PTRs P3 / P4 reserves could in time be upgraded to P2 status and states for a Co. with such a small market cap they appear to be sitting on potentially huge resources….!!!! That said PTR seems dead in the water and i have recently greatly reduced my holding in the Co. For me the great elephant in the room holding the SP back is the tried and failed B.O.D. New money, but same jokers at the head of the Co.

The typical jnr resource investor will probably be far more excited about production increases.Personally, I’d much prefer to see Oil India’s $45 million devoted to upgrading reserves & resources to 2P status. I’m encouraged by the emphasis on replacing reserves (er, lost in the farmout!) in the latest results – that’s the first mention in a couple of years – but I suspect management will straddle two stools here, trying to balance exploration success with production increases.

Somewhat surprisingly, I’d go a little easier on the board myself… I was impressed with their operating acumen & communications/IR policy before everything started going horribly wrong…as was every other investor, if they’d care to remember correctly. Most companies/management teams create their own problems, but I don’t think this was the case here. Then, as problems became more intractable, as time dragged out, as the share price tanked, and as expected cash/cash flows failed to materialize,things spiraled lower and management ended up huddled into a ball, sucking their thumbs & refusing to communicate (honestly) with shareholders. This doesn’t excuse them in any way, but 90-95% of management teams would have done the exact same – they can’t help themselves, ultimately they’re agents, not owners…

So with this new cash, no debt over-hang, some Oil-India assistance, and a little luck & momentum, I don’t believe management are doomed to keep failing (as they do in most junior resource co’s). But let’s take everything step-by-step here – there’s plenty of upside potential here, so there’s no need to bet blindly on a great outcome here. I’d much prefer to pay up/average in on the back of steady diet of better news & improving investor sentiment. Keep buying the winners, not the losers!

Hi Wexboy
In calculating your Target Price of £0.353 pence, you have included the following :
11.3 M of 1P being proved and
61.00 M of 2P being Probable.
Yet when you mention the substantial dilution in asset value with Licence 61 and 67 reserves are reduced to 11.3M 1P and 72.2M of 2 P. Why the discrepancy between the 61 and the 72.2?
Many thanks

Yes, everything finally seems to be going its way for Aer Lingus now – new routes, nice passenger growth, cheaper oil, pension issue nearly wrapped up, etc. Once things are bedded down, I still think a return of capital to shareholders is inevitable, plus the fate of the Ryanair stake may be a catalyst also.

EUR 1.68, 1.715 & 1.75 are three (nearly-overlapping) technical levels to watch – see those break & it’s a strong signal long-term shareholder sentiment has turned & new investors are keen to board…

I just wanted to say thanks for your wonderful blog and for the reply on Aer Lingus back in November. I bought it at 1.65 & 1.76 and sold 2.40’s.

It was a meaningful profit. I have 3 kids and a pregnant wife. Your insight really made a huge difference for my family. I really admire your work and I learn new things every time I read your stuff.

Thank you so much!

Sincerely,

David Flynn

Ta muchly, David!

I’m delighted to hear it. And airline stocks are never easy to buy, so that’s a great investment – with some nice entry & exit prices…lots of people out there now wondering what the hell the government’s playing at/thinking!

NOTE: Excel download file (above) has been amended to correct my $TVCH:ID target price to EUR 1.000 (of course, as of July 2nd, you’ll need to also adjust for the fact TVCH has now gone ex-distribution).